Twitter as Tech Bubble Barometer

By

Spencer E. Ante,

Amir Efrati And

Anupreeta Das

Updated Feb. 10, 2011 12:01 a.m. ET

As Internet valuations climb and bankers and would-be buyers circle Silicon Valley in an increasingly frothy tech market, many eyes are on one particularly desirable, if still enigmatic, target: Twitter. Discussions with at least some potential suitors have produced an estimated valuation of $8 billion to $10 billion.

WSJ's Spencer Ante reports Twitter has become a very attractive takeover target, with some estimating 2011 revenues at $100 million and a potential takeover value of nearly $10 billion. Also, Verizon rolls out its iPhone to the general public today.

Executives at both Facebook Inc. and Google Inc., among other companies, have held low-level talks with those at Twitter Inc. in recent months to explore the prospect of an acquisition of the messaging service, according to people familiar with the matter. The talks have so far gone nowhere, these people say.

But what's remarkable is the money that people familiar with the matter say frames the discussions with at least some potential suitors: an estimated valuation in the neighborhood of $8 billion to $10 billion.

This for a company that, people familiar with the matter said, had 2010 revenue of $45 million—but lost money as it spent on hiring and data centers—and estimates its revenue this year at between $100 million and $110 million.

"Are these prices justifiable based on financial multiples? No," said Ethan Kurzweil of venture capital firm Bessemer Venture Partners. But these start-ups are building social services and have lots of data about their users and "the market is valuing that mightily right now."

A Twitter spokesman declined to comment on its finances, valuations and interest by other companies. Google and Facebook also declined to comment.

Twitter, which started selling ads last spring against its business of allowing users to send messages of no more than 140 characters, is just one of many tech targets being batted about as valuations climb. In December, when it got $200 million in new venture capital, Twitter was valued at $3.7 billion.

But since then Facebook raised $1.5 billion in a financing that valued the social network at $50 billion, up from $10 billion in mid 2009. Online-coupon provider Groupon Inc. rebuffed a $6 billion takeover offer from Google and set plans for a 2011 public offering—a prospect that had bankers rushing to Groupon's Chicago headquarters in recent weeks to make pitches. And just this week, AOL Inc. agreed to pay $315 million to buy the Huffington Post—about 10 times the news and commentary website's 2010 revenue.

ENLARGE

These rich valuations have led other start-ups to explore public offerings, bankers said. Internet music service Pandora Media Inc., for instance, plans a $100 million public offering, while business-networking website LinkedIn Corp. filed last month to go public, with a likely valuation of about $2 billion, according to people familiar with the matter.

The growing valuations also reflect a psychological shift among some entrepreneurs who are opting to remain independent and grow their businesses instead of selling early for a quick return. Twitter co-founder Evan Williams and current Chief Executive Dick Costolo have already both sold companies to Google.

Both Google and Facebook have discussed buying Twitter in the past and have kept their lines of communication open, people familiar with the matter said. One of these people said companies including Facebook and Google have expressed "latent interest" in an acquisition.

More on Twitter

On Wednesday, venture-capital firm Andreessen Horowitz said it had bought more than $80 million of Twitter shares through exchanges for private-company stock. A spokeswoman for Andreessen Horowitz declined to say what percentage of Twitter those shares represent.

ENLARGE

Biz Stone, co-founder of Twitter.
Reuters

Twitter's revenues and valuation have risen even as the company continues to work on ways to translate its more than 200 million registered users into a profitable business. Twitter, which was created in 2006, introduced advertising into its service last year.

One of the new Twitter ad services, called Promoted Trends, has been selling out its inventory every day, said one person familiar with the matter. The other two ad products, Promoted Tweets and Promoted Accounts, are also doing brisk business, this person said.

Despite the high valuations, Twitter's executives and board are continuing to work on building a large, independent company. People familiar with the situation said the company believes it can grow into a $100 billion company.

To do that, Twitter has been hiring engineers and increasing its work force to more than 350, up from 100 in January 2010. Twitter has also been building an executive team, appointing Mr. Costolo, a former Google executive, as CEO last year.

Twitter also hired Adam Bain, a former Fox Interactive Media president, to be its president of global sales in August. He has built a sales team of more than 20 people, a spokesman said.

"The company is having great ad-sales momentum right now, but we still think they need to do something big to increase usage and get more people seeing and interacting with tweets," said Debra Aho Williamson, an eMarketer analyst. "Most of their advertisers are just experimenting at this point; the challenge will be to get those advertisers to come back and buy more," she said.

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